The Chinese government has stripped the country’s main diamond exchange of its preferential tax treatment.
From November 1, importers of polished diamonds through the Shanghai Diamond Exchange (SDE) will no longer enjoy a heavily reduced rate of import value-added tax (VAT), according to documents the country’s State Tax Administration (STA) released last week.
Since 2006, Chinese taxpayers who import polished via the SDE and sell them into the domestic consumer market have paid full VAT — currently 13% — but received an immediate rebate of 9%, leaving their actual tax bill at 4%.
However, the STA has repealed the key elements of the 2006 notice announcing those terms, it said in a statement last Friday that outlined several changes to the country’s VAT policy (see attachment at the end of the statement). This means VAT will revert to the national rate of 13%. The government did not provide a reason.
A spokesperson for the SDE confirmed that China was eliminating the preferential policies.
“Ultimately, end consumers will have to pay 9% more,” he said. “Undoubtedly, our central government will be more stringent in anti-smuggling efforts to protect the legal business. This new policy presents both challenges and opportunities for us. We will need to enhance our promotional activities in the Chinese market.“
Key trade route
The SDE is one of the mainland’s two diamond exchanges with membership in the World Federation of Diamond Bourses (WFDB). The other is the Guangzhou Diamond Exchange in the Guangdong province.
The government introduced the favorable tax system almost 20 years ago to reduce smuggling by encouraging imports via the SDE.
All polished diamonds entering China for domestic consumer use essentially must go through the bourse, given its advantageous tax terms. These also include 0% customs duty — a rate that is not changing, WFDB president Yoram Dvash told Rapaport News on Tuesday.
Natural impact
WFDB representatives in China are trying to meet with senior officials at the Ministry of Finance and the Shanghai municipal authorities to explain the “serious impact” of the decision, Dvash elaborated.
“The situation is new and developing, but we hope that when the authorities see the data showing a sharp decline caused by the higher VAT, they may reconsider this decision,” he said.
China’s domestic diamond industry has suffered in the past three years amid weak consumer appetite for the product. This emanated from an economic downturn, social changes, a lack of confidence in diamonds’ investment value, and a further shift toward gold.
“There is no doubt this decision will make it much harder for the Chinese diamond market to recover to its previous levels, especially since diamond imports into Shanghai increased by nearly 15% over the past six months,” Dvash elaborated.
Lab-grown industry
The government’s goal is “tax equity” between commodities, explained Liang Weizhang, CEO and founder of Guangzhou-based advisory firm HubWis Jewellery Strategy & Creations and former general manager of the Guangzhou Diamond Exchange.
Within the jewelry segment, one impact could be on the domestic lab-grown diamond industry, Weizhang added.
China mainly sources its natural diamonds from overseas, with the majority undergoing cutting and polishing in India. However, the existing tax rebate encouraged imports of polished lab-grown diamonds, despite China being a major grower of synthetic rough. Much of this material goes to India for polishing and then to export markets or back to China for domestic consumption.
For those goods that will eventually be sold to local consumers, the tax change could encourage growers to keep the rough in China for domestic cutting and polishing.
“China’s natural-diamond production remains small, and the market continues to be primarily consumption-oriented,” he said. “Over the past decade, however, China has become the world’s largest producer of lab-grown (synthetic) diamonds. The new VAT policy ends the previous tax-rebate privileges for lab-grown diamonds processed overseas.”
Gold prices
For imported stones, any negative effect on retail demand would be minor compared with the impact of the soaring gold price, said Shanghai-based diamond dealer and consultant Chen Shen.
“Traders will have to pay more tax [on] importing, but if there is money to be made, they will import anyway,” Shen commented. “If the demand is low, the tax [will not make a] big difference.”
Update, October 23, 2025: An additional quote from a spokesperson for the Shanghai Diamond Exchange has been added to this story.
Image: The Shanghai Diamond Exchange. (Shanghai Diamond Exchange/David Polak)
Source : Rapaport